Chiang Chapter 1

The nature of Mathematical Economics

Questions Is Mathematical Economics another branch of Economics? Does it focus on particular branches? Does it replace non-mathematical economics?

No, no and no

!d"antages of #se? - ma$es our assumptions e%plicit - ta$es us be&ond graphical anal&sis to the n "ariable case 'man& models ha"e more than ( "ariables) - ma$es us use a concise language - there*s a +ealth of math theor& to use

Is it realistic? ,ometimes not, but neither ma& all theor& be, including non mathematical economics!ll theor& is .ust that / a theor&It can be a good starting point

Do +e need our o+n boo$s on it? - +e use specific bits, +e +ant our o+n economic e%amples, not .ust dr& math ones

,o +hich bits do +e use and ho+? - #se economic theor& to set up models i-ee0uations 'ch () - understand theor&1elements behind models 'are the& fns, +hat is domain etc) 'ch () - In"estigate general or partial s&stems, usuall& +ith lots of e0ns1"ars, thin$ about EQM 'ch 2) - linear algebra to sol"e for EQM "alues 'ch3) - as$ if there are solns, ho+ man&, are the& allo+able 'ch 4) ',T!TIC !N!56,I,) - 7hat if e%og "ars shift? 8o+ does EQM change? 'ch 9, :) C;M<!=!TI>E ,T!TIC,

- 7hat if +e can*t hold some "ariables constant +hile others change? T;T!5 DI??E=ENTI!TI;N 'ch @) - To find endog "ars A fn 'e%og "ars) is impossible, use IM<5ICIT ?N T8M 'ch @) - !re all e0uilibria good? 8o+ can +e tell? ;<TIMI,!TI;N 'ch B, 11) - 8o+ can +e anal&se gro+th of "ariables 'more macro t&pe problems)? #se 5;C,1ED<;NENT, 'ch 1E)

Is mathematical economics the same as Econometrics? N; - metrics is concerned +ith measuring economic data, using empirical obser"ations, using statistical methods to estimate certain parameters, and test h&potheses - math economics applies pure math theor& to economic anal&sis, doesn*t touch data - the t+o ma& inform each other 'start +ith math "ersion of economic model, test it out +ith data)-